USKBC Blog

On May 9, South Korea voted to elect a new president, Mr. Moon Jae-In. Exit polls and early vote counting indicated a sweeping victory for Mr. Moon. With voter turnout surpassing 77%, Mr. Moon won nearly 41.4% of the votes – more than 18 percentage points over his closest rival, Mr. Hong Joon-pyo.

The snap-election came following the impeachment of Park Geun-hye and amidst heightened tensions on the Korean peninsula. Given the unusual nature of the election, Mr. Moon will assume the presidency immediately rather than after the normal 60-day transition period. This will place additional pressure on Moon to move quickly and the early task of appointing a Prime Minister will be a good indicator of the challenges he may face working with a National Assembly that is not controlled by his party.

Several major issues shaped the campaign, and will be critical for the new President in maintaining support.

North Korea: The relationship with the North was a major point of contention between the candidates, as Mr. Moon’s support for the “Sunshine Policy” – pledges to reopen inter-Korean exchanges, resume economic cooperation with the North (including restarting production at the jointly operated Kaesong Industrial Complex), and redouble diplomatic efforts – is starkly different from the more hardline approaches favored by other candidates. This ‘softening’ on North Korea diverges from the past nine years of conservative leadership, and is at odds with efforts by the United States, Japan, and the rest of the international community to curb North Korea’s nuclear program through increased economic sanctions. However, given the North’s increasing provocations, many believe Mr. Moon’s policy space here has been reduced.

THAAD: U.S. deployment of the Terminal High Altitude Area Defense (THAAD) system in Korea was another hot button issue. China’s economic retaliation against Korea for deploying the THAAD, as well as President Trump’s Twitter musings that South Korea should pay some or all of the $1 billion price tag (contrary to the existing agreement), propelled the issue to the top of the agenda. Although Mr. Moon did not publically oppose THAAD, he repeatedly criticized former President Park’s decision-making and insisted that the next president have the ability to review the decision.

Economic Policy: Mr. Moon comes to power at a delicate time in Korea’s economic recovery. The export-driven economy still relies heavily on trade with the United States and China – neither of which can be taken for granted these days. As mentioned, China has demonstrated its willingness to retaliate economically against Korea for perceived infringements on national security interests. Compounding matters is the uncertainty over what the Trump administration may seek to do with the U.S.-Korea FTA (KORUS) given its tough rhetoric on trade deficits generally, and KORUS in particular. To the latter point, it is expected that Moon will send a senior delegation as early as possible to Washington to address any grievances related to the agreement.

Domestically, Mr. Moon’s economic policy agenda has focused on social spending, chaebol reform, and wealth redistribution. He has said he wants to hire more firefighters, teachers and policemen, but the 389-page manifesto from Moon’s Democratic Party is short on details. Only four pages outline how the new administration would finance these new jobs and other social welfare projects, as there are only vague descriptions to “strengthening taxation for the rich” and “higher fines for unfair practices.”

It is not entirely clear from the limited detail how Mr. Moon will proceed on fiscal and economic policy. It seems unlikely that he will pursue radical changes in policies followed by previous conservative governments, as he is not likely to interfere in Korea’s fragile economic recovery too much. Further, Moon’s top adviser for economic policy is Kim Kwang-doo, a conservative economist who served as the economic advisor for Park Geun-hye’s 2012 campaign and was responsible for the promises of tax cuts and a relaxation of corporate regulations. Mr. Kim’s name has been floated as a possible candidate for Prime Minister, or other senior Cabinet positions.

Youth unemployment remains around 10 percent, adding to the challenges of rising household debt and a rapidly aging population. Tackling the challenge has been a major focus of the campaign, and Mr. Moon has stressed government action as the solution, specifically through increasing public-sector employment by 810,000 jobs. Mr. Moon’s plan diverged from other candidates in its approach, as Ahn Cheol-soo, for example, advocated for a private-sector led job growth fueled by government-aided small- and medium-sized enterprises.

Calls for chaebol reform are nothing new, but Mr. Moon has pledged to give labor a bigger voice in management, and restrict abuse of the chaebols through corporate governance reforms like boosting the roll of the shareholders. But the scandal involving the chaebols and former President Park has led to more scrutiny and urgency for reform, so public expectations about meaningful action to make the chaebols more responsive to economic concerns of the population – like youth unemployment – and less reliant on political favors is as high as ever.

Constitutional Revision: In April, a special parliamentary panel on the possible revision of Korea’s constitution was held. Although not widely reported in the press, the implications could be vast. Mr. Moon – who was invited by the panel along with fellow presidential contenders to discuss the current presidential structure – called for changing the term limits from the current single-term, five-year presidency, to a renewable four-year one. He argued that this would help to ensure consistent policy implementation, and suggested that the next presidential election be held in 2022, concurrent with local gubernatorial and mayoral elections. Further, he called for a decentralization of authority to provincial governments.

Don’t forget the National Assembly: Although Mr. Moon’s Democratic Party comes to power holding the most seats of any in the National Assembly, it does not have an outright majority. This presents a challenge for Mr. Moon and prospects for a viable coalition partner are dim. Coupled with the security and economic challenges, Moon’s pathway to push significant change is not an easy one.

This is uncharted territory for South Korea. The USKBC will report on new political and policy developments regularly. In the meantime, do not hesitate to contact us with questions.

As expected, South Korea’s Park Geun Hye’s impeachment was upheld by the Constitutional Court in a unanimous 8-0 vote Friday morning. The Court found Ms. Park to have committed “acts that violated the Constitution and laws” and marks the first time that a South Korean leader has been removed from office by impeachment. A new election will be held within 60 days, with May 9 as the expected date.

The decision comes at a turbulent time for North East Asia. The next leader will inherit a Korean economy growing at its slowest pace in a decade and an increasingly belligerent – and capable – hostile neighbor to the North. We will continue to monitor any economic developments closely over the election cycle, and work with our partners in industry and government to ensure as smooth a transition as possible.

It is worth noting that the security situation on the Korean peninsula has already begun to feature prominently in the domestic political discourse. There are sharp disagreements on how to approach the relationship with Pyongyang, highlighted by the public reactions this week to the deployment of an advanced American missile defense system known as THAAD (Terminal High Altitude Area Defense). Complicating matters are China’s actions to apply ‘soft sanctions’ – from K-pop concert cancelations to the closure of 23 China-based Korean department stores – which will certainly play into the political calculus of Korea’s leading politicians.

Who to watch: With the withdrawal of former UN Secretary General Ban Ki Moon earlier this year, Moon Jae-In of the opposition Minjoo Party has solidified his lead in the polls. South Chungcheong Governor Ahn Hee-jung has emerged, to the surprise of political experts, as a dark-horse candidate within Mr. Moon’s Minjoo Party. His popularity has exploded, increasing from 3% support to 19% support since early January. This development in the primary landscape has some predicting that Ahn’s streak could see him emerge as the leading opposition party candidate, making him one to watch closely over the next two months.

Last week, the US-Korea and US-Japan Business Councils joined 170,000 others from across the globe in Las Vegas, Nevada for the 50th Consumer Electronics Show (CES). The technology on display was nothing short of amazing and it is clear that companies from all sectors of the economy are thinking big. “World-changing, live-saving, universal big,” as we are often reminded.

The technology was clearly the headline-grabber, and deservedly so. But behind the scenes, there were important policy discussions taking place and a strong recognition that these emerging technologies will not be able to meet their potential without sound, transparent regulation and best practices. The Councils are encouraged by what we heard, and are looking forward to thoughtful and inclusive discussions with the new Congress and Administration.

For starters, we look forward to continued collaboration between industry and government, both at home and abroad. The National Telecommunications & Information Administration’s multi-stakeholder review process and platforms such as the US-Korea ICT Policy Forum and the Japan Internet Economy Dialogue have given industry an opportunity to share private sector developments with government, and provide expertise that may not otherwise be available. We look forward to continued, meaningful, and regular opportunities to do the same.

We hope this collaborative spirit can transition to the regulatory space, and we echo the U.S. Department of Commerce’s Alan Davidson in his remarks that continued success in the digital economy requires a light-touch regulatory model and recognition that industry needs to lead in certain areas. Similarly, we second Congressman Hurd’s warnings on the potential for innovation to be strangled by over-regulation, and strongly encourage a “do no harm” regulatory approach.

Regulatory coherence and cooperation are needed to create an environment for new technologies to flourish and will be key to enabling the digital economy to deliver benefits on a large scale. Disparate regulations from a series of regulators make compliance extremely difficult and costly, and disproportionately impact small and medium size businesses. Further, as parts of the economy become increasingly digital, regulations increasingly have impact well beyond their intended target. Dialogue between regulators, industry, and various parts of government can help avoid these instances, and we encourage a similar approach with our global partners on capacity building and best practice sharing in the regulatory space.

Similarly, given the potential of the digital economy to drive economic growth and productivity globally, close coordination between the United States and key partners like Japan and Korea is also critical. Recognizing the need for such coordination and smart, updated rules, the Councils remain supportive of the cutting-edge obligations hard-won during years of the Trans-Pacific Partnership negotiations. As the new Congress and Administration seek to strengthen the United States position in the global trading system, prohibiting digital customs duties, enabling cross-border data flows, and preventing localization barriers are needed across all sectors to remain competitive in today’s global economy.

On a global scale there are real opportunities for governments to be strategic, in both their leadership and their investment. Setting comprehensive IoT strategies would be a great place to start, as would improving the way that governments themselves adopt technology. Coordination on international standards will help spur innovation and ensure scalability that will be transformational. Moreover, as governments outline future infrastructure projects, the Councils suggest that proper resources are devoted to increasing broadband connectivity, developing 5G networks, and efficiently allocating spectrum.

Getting such policies right is going to take a lot of work, coordination, and collaboration but if CES was any indication of what lies ahead, we have a lot of reasons to be optimistic. We were encouraged by the public bi-partisan recognition that we need smarter regulations that do not constrain American competitiveness and eager to hear that similar support existed for developing a IoT strategy. We also look forward to working to ensure that infrastructure moving forward is ready for the 21st century and that e-commerce and digital trade rules are front and center on the trade agenda.

This post originally appeared on the U.S. Chamber of Commerce’s blog and was written by James W. Fatheree, Executive Vice President of the U.S.-Korea Business Council.

With the Trans-Pacific Partnership (TPP), a free trade agreement with the United States and 11 other Pacific countries, finished and expected to be debated in Congress later this year, the usual opponents of trade agreements are at it again, using cherry-picked data to discredit trade agreements or trade in general.

We are exporting to Korea more American manufactured goods than ever before. Still, our goods trade deficit with Korea also has increased. How can this be?

Economies tend to import more goods when they are growing and less when they are slowing. Korea’s economic growth has been in a slow growth mode relative to its previous high levels since before KORUS went into effect in March 2012. Whereas the Korean economy grew at a pace over 6% in 2010, Korean growth has fallen from 3.7% in 2011 to 2.6% in 2015. Korea’s domestic demand, which affects import levels, has weakened as growth has slowed. While U.S. growth rates have been in the 1.5% – 2.5% range, U.S. domestic demand has picked up, and overall U.S. imports have trended up. The impact? For now, a widening U.S. goods trade deficit.

With KORUS, however, U.S. goods exports also are now much more competitive than before and are thus faring much better – even with Korea’s weaker economy. The data tell the story: Korea’s imports from the world fell by 17% in 2015, but in comparison, its imports of U.S. goods fell by less than 3%.

Even with Korea’s more challenging economic climate, many U.S. manufactured and farm products have still made impressive gains, thanks to KORUS:

Korea has now eliminated nearly all of its import tariffs on U.S. industrial goods, which used to average nearly 7%. The resulting gains for U.S. manufactured exports to Korea have been strong – over 8% overall. Not every product category has gained, but many have; U.S. auto exports to Korea are up over 200% by value since KORUS has been in force, for example.

Korea has eliminated the majority of its average 53% tariffs on U.S. agricultural exports – and over time, it will eliminate nearly all of these. As a result, many U.S. farm and ranch exports to Korea have experienced large gains – often double or sometimes even triple-digit gains.

America is running a large and growing trade surplus with Korea in services. Who knew? We did.

Goods are important, but America’s innovators and service providers also support high-paying American jobs. Yet the contribution of KORUS to these exports and jobs is nearly always ignored. Here are the facts:

U.S. services exports to Korea have increased every year since KORUS opened new services export opportunities for US providers – topping $22 billion in exports in 2015.

America’s trade surplus with Korea in services in 2015 rose to over $11 billion, and our trade surplus in services has continued to rise each year since KORUS went into effect.

New rules matter. A lot.

KORUS has introduced a wide range of rules that make Korea’s market more open and transparent across many areas. This is critical to give American exporters and service providers the predictability they need to steadily increase their export growth.

Korea has long been a challenging market for many U.S. exporters, and KORUS has not done away with every issue or challenge. However, the KORUS agreement explicitly lays out dispute settlement procedures as well as a consultative process covering 20 sectors or areas that enables U.S. and Korean trade officials to address implementation challenges in these areas.

Significant progress has been made as a result, as a number of thorny implementation problems have been resolved. Some implementation challenges remain, and it is imperative that they be resolved quickly, fully and faithfully in line with the KORUS agreement so that U.S. exporters and service providers benefit fully from it. Moreover, as cited in a recent U.S. Treasury Department report, Korea’s practice of intervening in currency markets to weaken the Korean won is also problematic, as this can quickly undermine the market-opening benefits of an FTA.

Still, to assert that that KORUS is a failure is a position not supported by a balanced assessment of the agreement. Overall, most U.S. exporters report a much improved environment – and are now able to begin to explore and take advantage of new opportunities in Korea. Many of the barriers that kept our exporters out would still be there if it were not for the FTA, and these are rules that work for American exports.

Bottom Line: KORUS Is Opening the Korean Market and Creating New Opportunities for U.S. Exporters and Service Providers

The U.S.-Korea FTA is creating important new opportunities for American exporters and service providers, thus contributing to U.S. job growth.

All trade agreements require continued effort to ensure that they deliver the intended results. Many American manufactured, agricultural, and services exporters are doing more business in Korea than ever before – even with Korea’s slower economic growth and some lingering Korean implementation issues. Korea’s market is becoming more open, predictable, and business-friendly, and it will become even more so as Korea eliminates more tariffs and implements new rules in line with its KORUS commitments over the next several years.

Unless America is proactive in forging and enforcing similar agreements that remove barriers and set rules for trade that reflect American values and interests, we will be locked out of the best terms that our trading partners have to offer. To be sure, others are already filling that void.

So it is important that we all take the full view before concluding KORUS or our other trade agreements are a failure. The full picture shows otherwise.

President Park’s ruling Saenuri party suffered a surprise defeat in this week’s National Assembly elections, making it the first ruling party in Korea in 16 years to govern without a majority. The conservative Saenuri party won 122 seats for the 300-member National Assembly, which leaves the prospect of an early start to the lame-duck session of her presidency. The main opposition Minjoo Party won 123 seats, and the newly formed People’s Party led by tech-titan and former Minjoo Party member Ahn Cheol-soo won 38. Of note, Freshmen Members will make up 44% of the National Assembly, and female representation increased slightly to 26 members, but this remains well below the OECD average of nearly 25%.

The results of the election clearly signaled to the current leadership that the public’s main priority is domestic economics. The voters are concerned about issues of fundamental economic security such as growing inequality, high youth unemployment, and increasing levels of household debt. It is important to note that these concerns are part of a growing global trend that are not specific to Korea and are the same issues that President Park campaigned on in December 2012. This may not be surprising considering the oscillation of party leadership between the parties in recent months, a dynamic that may place strains on cooperative efforts moving forward.

As the numbers indicate, no party has a majority and the potential for political gridlock is high. An empowered progressive voice will continue to criticize the Park Administration for high unemployment, which may stall any momentum the government had in pushing through labor reforms. There will also be calls for the President to alter her hardline approach on North Korea, although recent provocations from Pyeongyang make any shift in inter-Korean policies unlikely.

Moving forward, Ahn Cheol-soo’s centrist People’s Party will be a key to watch moving forward and he has an opportunity to re-shape the political landscape leading into the 2017 Presidential elections. Park’s reaction to the National Assembly is also something observers should be watching. Will she view the new mandate as hostile or as an opportunity to push through some structural reforms to achieve her campaign promises of economic democratization that were subsequently used by the Minjoo Party during these elections?

While there is general agreement on some of the major problems to be tackled – e.g. high youth unemployment, high household debt, inadequate social welfare/retirement coverage – accompanied by some narrowing of the gaps between the two major parties on policy, it remains unclear what approaches the parties will take toward trying to forge compromises on these and other issues. Flexibility and willingness to compromise among President Park and the key political parties of course will be critical to moving forward with any legislation, although there are also legitimate concerns that we may see more political gridlock and posturing than action at least through the coming Presidential election in 2017.

What’s New

On June 28, the U.S. Chamber of Commerce and Korea Chamber of Commerce and Industry co-hosted a reception and dinner in honor of H.E. Moon Jae-in during his first visit to Washington as President of Korea.